FDIC: FIL-4-2006: Proposed Interagency Guidance
The Agencies (Office of the Comptroller of the Currency, Treasury (OCC); Board of Governors of the Federal Reserve System (Board); Federal Deposit Insurance Corporation (FDIC); and Office of Thrift Supervision, Treasury (OTS)) have observed that some institutions have high and increasing concentrations of commercial real estate loans on their balance sheets and are concerned that these concentrations may make the institutions more vulnerable to cyclical commercial real estate markets. The Agencies have previously issued regulations and guidelines that outline supervisory expectations for a safe and sound commercial real estate lending program. The recently released proposed statement (http://www.fdic.gov/news/news/financial/2006/fil06004.html) is intended to reinforce that guidance as it relates to institutions with concentrations in commercial real estate loans.
The proposed statement goes on to state that… “Policies should address the ongoing monitoring of individual loans, including the frequency of account reviews, updating of borrower credit information, and status of leasing. Policies should require periodic comparisons of actual property performance information with projections at the time of original underwriting and the appraisal assumptions (for example, lease-up assumptions) to determine if any credit deterioration or value impairment has occurred. In addition, policies should specify the frequency with which transaction risk ratings should be reviewed to ensure they appropriately reflect the transaction’s level of credit risk.â€
What does this mean for appraisers? Could this be an opportunity to do portfolio analysis for your lender clients or does this potentially reflect an additional number of assignments as monitoring of credit risk increases? I found the following to be interesting both in what it is saying and what it leaves out.
“Institutions should perform ongoing evaluations of the market conditions for the various property types and geographic areas or markets represented in their portfolio. Market analysis is particularly important as an institution expands its geographic scope of operations into new markets. In making decisions about new markets and new originations, market analysis should be an important evaluation criterion for individual credits as well as for the portfolio. Institutions should utilize multiple sources for obtaining market information such as published research data, monitoring new building permits, and maintaining contacts with local contractors, builders, real estate agents, and community development groups.
Management should ensure that the institution’s CRE lending strategy and portfolio risk assessments integrate the findings of its market analysis and evaluation. Moreover, market information should provide management with sufficient information to determine whether revisions to its CRE lending strategy and policies are necessary to respond to identified market trends, and to form the basis for its stress testing.â€
The Appraisal Institute has been a leader in market analysis education and I see the preceding paragraph in the proposed statement to be a recognition on the part of the Agencies that sound market analysis is vital to understanding the risk of their portfolios. What bothers me most is that appraisers are not included in the list of the “multiple sourcesâ€. Does this represent an opportunity for us as an organization and as individual appraisers to help the Agencies and our lender clients understand that appraisers are well suited to this type of analysis? I encourage you to read the proposed statement, formulate a position, and provide feedback as outlined in the document.
If you are like me, you go to several web sites each day and look for new content. For instance I monitor the Office of the Comptroller of Currency and the FDIC for bulletins that may have an impact on appraisal related issues. Many sites are now using RSS - an acronym for Really Simple Syndication, a family of XML file formats for web syndication used by news websites and weblogs - that make it much easier to track changes. In fact, there is an RSS link for this blog - if you have a feed reader/news aggregator you can see automatically when new posts are added or the page changes. But what do you do for sites that don’t have RSS? I found a utility called URLy Warning (Early Warning with a play on URL) that accomplishes this task very well. It can help remove some of the friction in your life and web surfing. The software download is free and will monitor one site free of charge. To monitor more than one website, there is a one-time charge of $29.95.